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Supplemental Transition Accounts For Retirement: STARTs 101

Let's face it: Americans are woefully unprepared for retirement. Surveys consistently tell us that far too many workers have insufficient retirement funds or even absolutely nothing saved for retirement at all. Sadly, these workers will be too dependent on Social Security benefits to have a comfortable retirement.

Many of these workers will claim benefits before their full retirement age (FRA) and receive lower benefits as a result. In 2013, 42% of men and 48% of women claimed benefits at the minimum age of 62, reducing their benefits by up to 30%.

A joint proposal by researchers at AARP, George Mason University, and the Brookings Institution would address this issue with a new program designed to fill the benefits gap. Supplemental Transition Accounts for Retirement (STARTs) are designed to cover the transition phase from early retirement to FRA and possibly beyond.

Retirees with a START account would have to exhaust this account first before drawing their regular Social Security benefits. For beneficiaries planning to claim at age 62, START would allow Social Security benefits to grow until they reach FRA (or are at least closer to FRA). This would increase monthly benefits by up to 30%.

By waiting later to claim START benefits, you may be able to hold out claiming Social Security benefits past your FRA – adding up to 8% extra per year in your benefits between your FRA and age 70.

Where will the money come from? Just like Social Security, it comes partly from you and partly from your employer, with an added progressive contribution from the government designed to help low-income families.

As proposed, every employee will be required to add 1% of earnings to the START program as a payroll deduction. Employers add another 1% to the pool. Employee contributions are post-tax dollars while employer contributions are pre-tax. As with Social Security, the percentages refer to income up to the limit subject to Social Security payroll taxes ($127,200 for tax year 2017 and $128,400 in 2018).

The federal government will kick in up to an additional 1% of earnings for low-income couples with an adjusted gross income (AGI) below $40,000, single taxpayers with an AGI below $20,000, and head of household filers with an AGI less than $30,000. The contribution phases out with higher income, disappearing at $50,000 for couples and $25,000 for singles.

As with the standard payroll tax, self-employed workers will make both employer and employee contributions – making life even more difficult as an independent contractor.

According to the proposal outline, the average monthly Social Security benefit would rise by 5% to 7% overall. Lower-income workers, those most in need of extra funds, would see a 10% increase in monthly benefits. As a result, STARTs are projected to reduce poverty for those age 62 and above by 0.4 percentage points by 2045 and 0.6 percentage points by 2065.

Skeptics point out that this is effectively a parallel program to Social Security with income redistribution thrown in. If the government can't manage Social Security efficiently, why should this program be any different? Conversely, would START consume money that employees would normally invest in their 401(k) plans, which could produce a higher rate of return?

The START program has an uphill battle, especially if it is rightfully labeled as a mandate. Don't expect a START program to help you prepare your retirement – start your own program instead. If you already have a retirement program in place, re-assess it to make sure that you are on track while you still have time.

In short, you should be responsible for your own retirement. Give that responsibility to the government at your own risk.